Signed into law in late 2019, The SECURE Act is the most comprehensive retirement-centric piece of legislation the country has seen in better than a decade; its inherited IRA and updated RMD provisions could influence your retirement and estate plans in a big way. Following is some background on what the passage of the SECURE Act has changed, and how that could affect you and yours.
The SECURE Act comes with two major benefits for retirement savers. However, these benefits come at a cost for their heirs:
Benefit 1: There’s no longer an age limit for contributing to an IRA. Previously, those over 70½ could not contribute. Eliminating the age limit creates new possibilities for retirement savers to grow their accounts.
Benefit 2: The age at which required minimum distributions takes effect has been pushed from 70½ to 72.
Cost: The stretch IRA, a popular wealth-transfer strategy associated with inherited IRAs, has been eliminated for most beneficiaries other than spouses. Non-spouse beneficiaries must bring the entire value of the account to zero within 10 years of the IRA owner’s death.
Overall, the passage of new retirement legislation in the SECURE Act will go a long way in helping retirees not to outlive their income. If you have inherited IRAs as part of your wealth-transfer plan, the time is opportune to reconsider the named beneficiaries. It is also a good moment to contemplate the conversion of your traditional IRA assets to a Roth.
Here are two suggestions for taking advantage of the benefits, while staying away from the costs of the new legislation:
Tip #1: Consider Naming Your Spouse as Your Beneficiary
It used to be that, with an inherited IRA, it made sense to select a beneficiary who was younger than your spouse. This allowed for additional tax-favored growth of the balance remaining in the account. Now, naming a spouse as the primary beneficiary of your IRAs could allow them to continue tax-favored growth without having to follow the aggressive 10-year timeline for withdrawals.
The surviving spouse could use that RMD income to make gifts to their heirs while alive, at the same time using the income from a withdrawal to contribute to a taxable account that would receive a step-up in cost basis at the time of death, leaving the heirs with an account largely free of tax consequence.
Net net: With the new legislation, teh time is ripe for rethinking your plans for inherited IRAs. There is often a significant benefit to naming a spouse as a beneficiary and then allowing that asset to be passed to the next generation versus giving it directly to the child.
Tip #2: Converting Your Traditional IRA to a Roth
Thinking about whether to convert your traditional IRA assets to a Roth? You should consider your current tax bracket as well as your beneficiary’s. If you think that beneficiary might find themselves in a higher tax bracket than you are now, it may be logical to convert your traditional IRA to a Roth now and pay the tax at your lower rate.
When rolling over assets from a traditional IRA into a Roth, you pay taxes on the withdrawal, while your remaining assets grow tax-free post-conversion. Under the SECURE Act, a Roth IRA must still be distributed within 10 years, but since distributions from a Roth account are tax-free, your beneficiaries can let the Roth account grow and then take the entire distribution in year 10. The upshot? Zero tax consequences.
For more information, please read: 2 IRA Changes to Consider Right Now, Thanks to the SECURE Act | Kiplingers